With the effects of the COVID-19 limitation measures wreaking havoc on the economy, many are talking of recession in the coming months. The news that the U.S. economy contracted for the first time in six years in the first quarter of 2020 only serves to strengthen these concerns. (1)
As a financial advisor, you are likely prepared for a recession and have built your clients’ portfolios to withstand whatever the markets and economy have to offer. But what about your business-owner clients who sponsor retirement plans? Are they as ready as you are? Are the retirement plans that they sponsor ready for a recession?
Now is the time to help your clients prepare for a recession, not just in their own personal finances but in the retirement plans that they sponsor. Here are some things that your clients can do to help their retirement plans weather whatever storm comes our way.
Help Participants Stay The Course
Even the most seasoned investors felt squeamish last month when the S&P 500 dropped 34% in close to a month’s time. How do you think 401(k) participants who are uneducated and new to investing feel?
One of the most important things you can do during a recession is to help plan participants stay the course and keep participating. It is hard for them to see their account values drop, but they will only recover if funds stay invested as the markets recover. Not only should they stay invested, but they should continue to contribute to their accounts, if possible, and take advantage of dollar cost averaging. During a recession or down market is when they will get the most for their retirement plan contributions.
As alluded to above, education is a key component of helping plan participants stay the course. If you don’t understand how the stock market and investing work, it is easy to panic and run the minute things stop going up. We, as financial professionals, know that this is one of the worst things workers can do, but many of them don’t understand enough to realize it. Plan sponsors need to provide education to their participants to help dispel fear.
Plan participants need to be educated on investing, dollar cost averaging, and the consequences of early withdrawals and plan loans. They say that knowledge is power, and that definitely applies to employer-sponsored retirement plan participants.
Maintain Fiduciary Compliance
Here we will turn our focus from the plan participants to the plan sponsor itself. All of the same fiduciary rules still apply, even when people are working from home. Security and prudent care must still be maintained, even when your clients and their employees are dealing with virtual work arrangements. It’s true that we are living in unprecedented times and it has been challenging for many companies to pivot to remote working, however, these new challenges do not negate the old rules, and plan sponsors will still be held liable.
Speaking of fiduciary liability, we will reiterate something that is oft repeated even during good times—document everything. It is always important to maintain good documentation, but the current work-from-home situation and potential recession make it even more important.
When stock prices and account values are rising, no one thinks twice about their retirement plan because they are happy. When hard times come, though, the scrutiny begins. Good documentation of decisions and actions will help a retirement plan stand up to any fault-finding mission spurred on by a recession.
How I Can Help
Do you have clients that sponsor retirement plans? Are they ready for a recession? If not, I can help. As a pension specialist, I partner with financial advisors to assist their clients with the retirement plans that they sponsor. To learn more about how I can help you and your clients, email me today at email@example.com.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses around the nation, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.